ABS two years on: cautiously optimistic

We are just at the second anniversary of licences being issued for alternative business structures (ABSs).  In the first year, about 40 licences were issued, and progress seemed slow. A year later, there are still only two licensing authorities, but there have been roughly another 200 new licences. The licences we expected for Abbey Protection, AIM-listed Quindell, Knights (backed by James Caan), and BT Law have all emerged.  Conveyancing Direct (connected to Connells estate agency and Skipton Building Society) and Jordans (the publisher) have gained licences, as has DAS Law (Bristol law firm acquired by the legal expenses insurer, itself part of insurance giant Munich Re).

The rate of ABS adoption is hotting up.  Or is it?

A year ago, we were told that there were another 200 applications in the pipeline.  And we have had another 200 licences issued in the past twelve months.  So it appears to have taken a year just to process the pipeline.  There are no indications of how many are in the pipeline at the moment.  No doubt some applications will have been withdrawn, and others processed to a licence within the year; but this rate of processing still does not look impressive – especially given that it is supposed to be easier now than it was initially.  Nor does it inspire when the timetable for authorisation is supposed to be completed with six months.  On that basis, last year’s pipeline should have been processed closer to Easter than Halloween.

Comparing licensing authorities

Of the 233 ABS licences disclosed on the public registers, 84% were granted by the Solicitors Regulation Authority and 16% by the Council for Licensed Conveyancers.  There does not appear to be much competition between licensing authorities for applications: most applicants are sticking with the regulator they already know (though interestingly, Kings Court Trust, which is authorised only for probate activities and could have chosen either, applied to the CLC because it was easier to establish a relationship with them).

There are few obvious other differences between the SRA and the CLC, but one did particularly catch my attention.  The CLC issues licences that are effective immediately.  The SRA, on the other hand, rarely does: in 80% of cases, there is a gap between the issue of an SRA licence and its effective date.  It is not clear from the register why this is so, and sometimes the gap is only a day while in other cases it can be a matter of months.

Both regulators have problems with the alphabet, with neither register quite being able to list its ABSs in entirely the correct order (are they both relying on humans for this rather than technology?).  The SRA register often annoyingly omits from an ABS’s address the name of the town where the business is registered or practises, which strikes me as a significant omission in a public register.

Finally, I remain exercised by the SRA issuing ABS licences in respect of all five of the reserved activities for which it has authorisation to 96% of applicants.  Only 8 of its 195 current licences have fewer than those five.  No doubt this is because the applicants wanted the ‘full house’.  But given the manifest strategies of the applicants, and the SRA’s much-vaunted approach of ‘risk-based and proportionate’ regulation, I’m still bemused that such a vast proportion of applications justify the full range of authorisation.  The CLC’s licences seem to be much more appropriately drawn given the nature of the applicants’ businesses.

Interestingly, the CLC register, in its disclosure of the reserved activity for which most of its ABS licence are issued refers to ‘conveyancing services’.  However, conveyancing services is not a reserved activity – it is reserved instrument activities.  Misleading the public?

Comparing ABSs

The chosen structure of ABSs shows a clear preference: approaching two-thirds (62%) of licences are issued to limited companies (95% for the CLC), with just shy of 30% to LLPs.  Further evidence that the traditional partnership is far less often the structure of choice for legal practice.  And, as a demonstration of the structural variety available, one ABS – Castle Park Solicitors – is a community interest company.

In addition to the multiple licences issued to Irwin Mitchell (5) and Schillings (2), there are some other instances of connected ABSs: Ageas Law with NewLaw, FMG Legal and H&R Legal, and Linkfield Claims Service with OC Law and OJM Law.  Putting together combinations of ABSs is clearly on the strategic agenda of some, and will further test the SRA’s resolve on the separate business rule.

ABS licence holders appear generally to want to be known by consumers for doing what it says on the tin.  The registered ABS names of 63% of licences include Solicitors, Lawyers, Conveyancers, Law, Legal, Legal Services, or Conveyancing.  Imagination in business naming is not running wild!

There also appears to be a geographical message from the ABS registers.  Just over a fifth (21%) of licences have been issued to businesses in the north west, with Wales also being popular (8%).  This predominantly represents the physical location of legal services relating to personal injury and other volume consumer services, but confirms the attraction of the ABS opportunity to these types of business as well as the entrepreneurialism and innovative spirit of those parts of the jurisdiction.

Conclusion

There is a pleasing variety of ABSs now in the market.  This ranges from very small firms taking the opportunity to reflect ownership between lawyers and managers, and between lawyers and other family members (very sensible, since such combinations are extremely common in other areas of the economy), to large organisations looking to enter the market.  There are equally varied backgrounds to the new entrants, including private equity, retailers, insurance companies, utilities, publishers, and real estate.

But perhaps the most notable conclusion is that a very good proportion of ABS licences have been granted to existing law firms that have wished to take advantage of the new structures – not so much to make a radical step or statement but simply to reflect the reality of their ownership and management, freed from the constraints of the historical restriction to solicitor-only control.

So the stage is set for further innovation and consolidation as we keenly anticipate the developments of year three.  Perhaps caution will subside and optimism will win.

5 thoughts on “ABS two years on: cautiously optimistic

  1. What effect have ABS’s had on the unaffordable legal services problem, anywhere? Are they expected to have any major impact so as to reduce the fact that the majority of the population cannot obtain legal services at reasonable cost?

    Are you asking the following questions as we are in North America (Canada & the U.S.)?
    (1) Are the law societies sufficiently responsive to public need?
    (2) Does the public have sufficient opportunity to have any impact upon the making of law society policy and practice?
    (3) Why choose the ABS form of “free enterprise law,” instead of socialized law?
    (4) Do our law societies understand the cause of the problem of unaffordable legal services?

    The cause is, lawyers continuing to deliver legal services by an outmoded method that has been abandoned everywhere except by the legal profession–the “handcraftsman’s method,” whereby the same law firm does all of the work necessary to deliver all legal services to every client captured by the firm, instead of contracting out those parts that require the work of specialists, as does the medical profession, and all of large-scale competitive manufacturing. As a result, they use a “support services method” of delivering their services and products. Law society leadership is needed to bring about that necessary change in the delivery of legal services. Where is it?

    The medical profession has developed a huge and sophisticated infrastructure of treatments and services whereby no one part of it provides all treatments and services for all patients. And it is constantly innovating by creating new specialists and treatments in response to new varieties of medical knowledge. For example, the doctor that was “the surgeon,” is now many very specialized different surgeons. There is no equivalent flexibility of development in the legal profession. Nor is there the equivalent of the family doctor who specializes in sorting and sending patients to all facets of the medical infrastructure.
    And competitive manufacturing, such as the motor vehicle manufacturers, use “special parts companies” that constitute a very flexible support services industry for the manufacturers. Each special parts company makes only a few such parts, but they make many thousands of them. The result is the necessary high degree of flexible specialization and scaling-up of production that creates a degree of cost-efficiency that no law firm can ever be capable of matching. Each service or product bears only a very small part of the costs of production. And many costs of production are fixed costs in that they don’t vary proportionately with the scale of production. “Bigger is better.” But mind this, the support services method provides a very high and refined degree of competence and cost-efficiency that the handcraftsman’s method can never be made to match.

    Therefore, the handcraftsman’s method, as used by the legal profession, isn’t capable of effecting the high degree of cost-efficiency that enables a product or service to steadily improve without having to increase its price. Engineers say, “nothing is as effective at cutting costs as scaling-up.”

    The price of legal services must increase, and will continue to do so, because: (1) society’s increasing development of, and dependence upon technology necessitates an increasing expansion and complexity of various forms of legal infrastructure (laws and their enforcers) with which to regulate its use; and, (2) society’s demand that the rule of law be brought to bear upon previously unregulated activities, such as those concerning, privacy, the environment, electronic commerce, the demand for an expanded presence of rights and freedoms, etc. These developments will never stop increasing the time needed to provide every legal service, if its quality is to be maintained. Time has to be paid for. Therefore, if there is no mechanism that enables legal services to cope with these pressures of ever-increasing volumes of laws and their complexity, and of technology to be understand, and volumes of electronically-produced records to be dealt with, without having to increase their price, the problem of unaffordable legal services will continue to grow worse.

    The problem is not caused by the absence of the right improvements to the system. The cause is the system–the handcraftsman’s method of delivering legal services. It is the appropriate method for creating great works of art, music, literature, and sculpture, and the like, but no longer for the production of goods and services. The recommended improvements to the existing system will amount to adding a motor to a bicycle, when the speed, capacity, and cost-efficiency of a motor vehicle is needed. Bicycles can’t do what motor vehicles do, and they in turn can’t do what airplanes do. Our law societies haven’t coped with that reality, nor called themselves to account for their long history of not engaging the problem.

    Therefore, the majority of the population without affordable legal services will become a bigger majority.
    The rich and the very poor will have lawyers, but the majority in the middle will not. That’s “two-tier justice.” Is it constitutional? Is it ethical? Is the view that the high cost of legal services is not the law society’s problem, still tenable?

    Should law societies continue to answer by asserting the deeply entrenched and traditional view that the price of legal services is to be determined entirely by means of a private conversation between lawyer and client? That view is used to justify law societies being neither proactive nor reactive to the problem of the unaffordability of legal services. But because of the principle as to the independence of the legal profession, it can’t be the government’s problem, i.e., governments can’t “meddle” into the fixing of legal fees. Therefore it’s nobody problem and duty to solve! Does a democracy have to continue to allow such traditional but damaging views to command its law societies’ thinking and their use and enjoyment of the powers given them by law?

    Won’t those ABS’s that enable law firms to become investment properties, impose an increased “profit duty” that will conflict with the fiduciary duty owed by lawyers to their clients? The latter binds the lawyer to do the best for the client; the former leaves each party free to do the best for itself. Law firms as owned by investors’ share capital demanding dividends, means a large step towards “free enterprise law,” and a larger step away from the professional duties arising from the ethical commands of the practice of law.

    The problem of unaffordable legal services has been very observable in its development for decades. What have the law societies done about it? Its “development” has inflicted steadily increasing damage of 4 kinds: (1) upon the majority of the population for lack of legal services; (2) upon the courts clogged with self-represented litigants; (3) upon the legal profession, shrinking while the increasing need for legal services due to an ever-increasing volume and complexity of law, should cause it to be expanding; and, (4) upon Legal Aid organizations, that provide free legal services to poor people, but whom governments dare not fund adequately while the majority of taxpayers cannot afford to obtain legal services for themselves.

    Have our law societies so effectively insulated themselves from having to respond to such needs and increasing damage, such that they will not change until the fear of the consequences of not changing is greater than the fear of the consequences of changing, i.e. they have not caused the legal profession to innovate by creating the necessary support services, so as to solve the problem, because that necessary fear has not yet been felt, nor perceived by them to have been attempted to be induced?

    Therefore, is a new management structure required to be imposed upon our law societies, or powers taken away from them and given to an independent regulatory authority, thus reducing the current self-regulation of the legal profession by means of its law societies?

    There is more detail to my thinking, (and of setting the successful solution into operation), to be found in my articles posted on the Social Science Research Network (http://ssrn.com/author=1398484), and the blog, Slaw.

    — Ken Chasse, a Canadian lawyer, Toronto (pictured on my LinkedIN profile:
    http://www.linkedin.com/pub/ken-chasse-j-d-ll-m/50/24/b19

  2. 3 November 2013
    Dear Prof Mayson,
    Thank you very much for your article and your analysis of the Solicitors Regulation Authority. As a member of the public, I feel that the SRA is simply not fit for purpose, and that there must be more effective, more cost-efficient ways of regulation. What was wrong with the previous system I wonder?
    It does seem that in all walks of life, be it medicine, education, law or business, that all these Regulators are regulating the life out of people. It is crazy. And the post-Jackson reforms and the judges racing to see who can impose the greatest sanctions is an unholy sight to witness [pardon the pun].
    Where is the old sense of do-as-you-would-be-done-by and a gentleman – or gentlewoman’s – word of honour?
    I fear that Justice is not what I was brought up to believe that it was simply a matter of establishing the truth irrespective of rules and regulations.
    Rosemary Cantwell

  3. Stephen – a few aspects are really puzzling me (not that that’s hard):
    1. in 2010 1100 new firms started up; in 2012 869; even at 200 ABS’ per year this is a net loss of new entrants to the market – stasis at best. Where’s the big bang innovation? It’s not the end of the music world’s cliff either – but strip out the small firm partners spouses and the vertical integration by claims management and insurance companies and its not even a drop in the law firm ocean.
    2. The Law Society Regulation Board cost £19.2m before the SRA kicked in and they are now running at £56.8mpa total cost of regulation. That’s £34.5m extra regulatory cost. Wouldn’t it be simpler to just give 200 practice certificate ‘lottery winners’ each year £170k each and leave them to it? It would certainly be quicker.

    One of the key aims from Clementi onwards was simpler, cleaner regulation and it seems this structure has unleashed a monster. Who will regulate the regulators? It should come as no surprise that mission creep is the order of the day. There is nothing 2 years in to say things have improved either for the clients or the entrepreneurial lawyers because of the SRA. There is a lot to be concerned about – not least value for money from regulators who seem to be delivering very little for an awful lot.

    d

  4. Hi Stephen
    This August 2013 Law Society article says 250 ABS applications are on the pipeline.
    BTW – great presentation at the College of Law Practice Management Futures Conference. Sorry to have missed the conference but was pleased to view it online.
    Dan Pinnington
    VP Claims Prevention and Stakeholder Relations
    Lawyers’ Professional Indemnity Company

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